Risk managers need to check supply chains as South Korea-Japan spat hots up

Japan’s decision at the end of July to drop South Korea from its whitelist of countries with approved export status will only intensify the ongoing trade war between the two nations, and will likely persuade the Korean government to accelerate its recently announced investments to protect supply chains for key national industries. Risk and supply chain managers with Asian and worldwide corporations will need to take a close look at their reliance on South Korean technology products and parts. US tech giant Apple, for example, relies on semiconductors produced by South Korean firms. The problem is that the removal of South Korea from Japan’s whitelist represents an expansion of controls over exports, following an earlier requirement that Japanese companies’ exports to South Korea be approved on a case-by-case basis for three materials used in semiconductors, smartphones and other high-tech devices that are all core Korean exports. The trade dispute between the two Asian economic powerhouses was originally sparked by a South Korean court ruling last year that allowed individuals to make compensation claims for wartime servitude against Japanese companies. Japanese Prime Minister Shinzo Abe’s government believes the issue was resolved through a 1965 treaty and $500m paid to South Korea in aid and loans at the time. The Japanese government has called for arbitration as stipulated in the pact. But the administration of South Korean President Moon Jae-in has rejected this line and refused to overrule the courts. Japan therefore declared a breakdown in trust and imposed the series of export controls on products critical to South Korea’s technology giants. Tokyo claims that the export controls are not related to the dispute, but South Korea regards them as retaliation. While international firms such as Apple that rely on South Korean supplies will need to take a close look at their supply chains and options available, the South Korean government will likely accelerate its own investment in protecting its industry’s supply chain as the dispute with Japan intensifies. Reuters revealed early last month that South Korea plans to invest about $6.5bn in research and development for local materials, parts and equipment during the next seven years, in an effort to cut reliance on Japanese imports and prevent supply chain disruptions. "We are doing a preliminary feasibility analysis (on the investment)," Cho Jeong-sik from the Democratic Party told reporters after meeting officials from the presidential office and government ministries, reported Reuters last month. Data firm IHS Markit reveals that Asian exporters are already under pressure because of a prolonged slowdown in the global electronics sector. "A reduction or elimination in the availability of these materials will significantly impede the production of memory and other semiconductor chips, impacting major semiconductor manufacturers including Samsung Electronics and SK Hynix," said Len Jelinek, executive director of semiconductor research at IHS Markit, according to the news agency. The trade war between Japan and South Korea, combined with the ongoing spat between the US and China, are presumably major reasons why IHS Markit’s latest survey of purchasing managers across the region does not make for positive reading, unless you work for an insurance company or bank. The Asia sector PMI indices are compiled from responses to questionnaires sent to purchasing managers in IHS Markit's Asian PMI survey panels, covering more than 6,000 private-sector companies in 13 countries. According to its July survey data, the industrial goods sector remained the weakest-performing segment in Asia, with production declining at a historically strong rate. The downturn softened slightly, however, when compared to June. In the automobiles and auto parts sector, production was scaled back for the ninth time in the past ten months, during July. “Weakness in the tech sector was also apparent, as technology equipment output decreased modestly, extending the current down that has been observed since the start of the year. Similar contractions were also seen in healthcare services, metals and mining, and forestry and paper products,” notes the data firm. Financials continued to dominate the growth sectors at the start of the third quarter, as insurance overtook banks to post the strongest upturn in activity. Renewed increases in business activity were also seen in industrials services and chemicals, while output growth strengthened in household and personal products, and real estate.

Risk managers need to check supply chains as South Korea-Japan spat hots up

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